fdi in retailing

7/27/2019 Fdi in Retailing

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FDI IN RETAILING

The Retail Sector What is retailing? Retailing is the interface between the producer and

the individual consumer, buying for personal consumption. It is the last link thatconnects the

consumer with the manufacturing and distribution chains.#Quick take:India is the fifth largest

retail market globally. Retail contributes to 10% of Indias GDP.India has highest retail density

in the world with 15 million outlets. India is a land of retail democracy

ORGANISED RETAIL UNORGANISED RETAIL SECTOR SECTOR

Organized retailing refers to trading Unorganized retailing, on the other hand,activities

undertaken by licensed retailers, refers to the traditional formats ofthat is, those who are

registered for sales low-cost retailing, for example, the localtax, income tax, etc. These include

the kirana shops, owner manned generalcorporate-backed hypermarkets and retail stores,

paan/beedi shops, conveniencechains, and also the privately owned large stores, hand cart and

pavement vendors,retail businesses. etc. only 5% of the total retail share. 95% of the total

retail share.

What (exactly) is FDI ? wikipedia: Foreign direct investment (FDI) refers to the net

inflows of investment to acquire a lasting management interest (10 percent or more of voting

stock) in an enterprise operating in an economy other than that of the investor. in layman s

terms:FDI is an investment to acquire long-term interest in enterprises operatingoutside of the

economy of the investor.FDI is a source of external finance which means that countries with

limitedamounts of capital can receive finance beyond national borders fromwealthier

countries.FDI is considered to be considered an ingredient in economic growth.


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Single brand retail in India -the change has arrived! Meaning: Single brand retail is one in which

a single item is sold across all outlets. Such as Reebok, Titan, Puma etc. Policy before 2011:FDI

up to 51 %, with prior Government approval, is allowed in retail trade of single brand products,

subject to the following conditions: FDI up to 51 % would be allowed, with prior Government

approval, for retail trade of Single Brand Products; Products to be sold should be of a Single

Brand only. Products should be sold under the same brand internationally. Single Brand

product-retailing would cover only products which are branded during manufacturing.

THE CHANGE:The Government finally has permitted 100 percent FDI in Single brand retail

under the government approval route subject to certain conditions. Some of the

stipulatedconditions are:(a) Products to be sold should be of a Single Brand only.(b) Products

should be sold under the same brand internationally i.e. products should be sold under the same

brand in one or more countries other than India.(c) Single Brand product-retail trading would

cover only products which are branded during manufacturing.(d) The foreign investor should be

the owner of the brand.(e) In respect of proposals involving FDI beyond 51%, mandatory

sourcing of at least 30% of the value of products sold would have to be done from Indian small

industries/ village and cottage industries, artisans and craftsmen. .

The good news is over.The real debate begins now!!

Multi brand retail in India Meaning:Marketing of similar and competing products by the

same firm underdifferent and unrelated brands. For example: walmart, big bazar, tesco **FDI in

multi brand retail was not permitted in India. however, the Government of India proposed some

policy changes in late 2011. they are as follows..


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PROPOSAL AS FINALISED BY GOVERNMENTA decision has been taken by the

Government to permit FDI in all products, in acalibrated manner, subject to the following

conditions:FDI in Multi Brand Retail Trade (MBRT) may be permitted up to 51%, with

Government approval;Fresh agricultural produce, including fruits, vegetables, flowers, grains,

pulses, fresh poultry, fishery and meat products, may be unbranded.Minimum amount to be

brought in, as FDI, by the foreign investor, would beUS $ 100 million.At least 50% of total FDI

brought in shall be invested in back-end infrastructure. Back-end infrastructure will include

investment made towards processing, manufacturing, distribution, design improvement, quality

control, packaging, logistics,storage, ware-house, agriculture market produce infrastructure etc.

Expenditure on landcost and rentals, if any, will not be counted for purposes of backend

infrastructure.

At least 30% of the procurement of manufactured/ processed products shall be sourced from

Indian small industries which have a total investment in plant & machinery notexceeding US $

1.00 million. This valuation refers to the value at the time of installation,without providing for

depreciation. Further, if at any point in time, this valuation isexceeded, the industry shall not

qualify as a small industry for this purpose.Self-certification by the company, to ensure

compliance of the condition at serial nos.(iii), (iv) and (v) above, which could be cross-checked

as and when required.Accordingly, the investors to maintain accounts, duly certified by statutory

auditors.Retail sales locations may be set up only in cities with a population of more than

10lakh as per 2011 Census and may also cover an area of 10 kms around themunicipal/urban

agglomeration limits of such cities; retail locations will be restricted toconforming areas as per

the Master/Zonal Plans of the concerned cities and provisionwill be made for requisite facilities


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such as transport connectivity and parking;Government will have the first right to procurement

of agricultural products

FDI POLICY- OVER THE YEARS.

OVERCOMING CRITICS

CONTROVERSY 1: Independent stores will close, leading to massive job losses. few thousand

jobs may be created, but millions will be lost.Organized retail will need workers.if Walmart-

like retail companies were to expand in India as much as their presence in the United States, and

the staffing level in Indian stores kept at the same level as inthe United States stores, Walmart

alone would employ 5.6 million Indian citizens. Adjusted for this market share, the expected

jobs in future Indian organized retail would total over 85 million.In addition, millions of

additional jobs will be created during the building of and the maintenance of retail stores, roads,

cold storage centers, software industry, electronic cash registers and other retail supporting

organizations. Instead of job losses, retail reforms are likely to be massive boost to Indian job

availability.

CONTROVERSY 2: Walmart will lower prices to dump goods, get competition out of the way,

become a monopoly, then raise prices.Walmart, Carrefour, Tesco, Metro, Coop are some of over

350 global retail companieswith annual sales over $1 billion. These retail companies have

operated for over30 years in numerous countries. They have not become

monopolies.Competition between Walmart-like retailers has kept food prices in check.

Canadacredits their very low inflation rates to Walmart-effect. Anti-trust laws and state

regulations, such as those in Indian legal code, haveprevented food monopolies from forming

anywhere in the world.Price inflation in these countries has been 5 to 10 times lower than price


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inflation in IndiaThe current consumer price inflation in Europe and the United States is less than

2%,compared to Indias double digit inflation.

CONTROVERSY 3: India doesnt need foreign retailers, since homegrown companies and

traditional markets may be able to do the job.India needs trillions of dollar to build its

infrastructure, hospitals, housing and schoolsfor its growing population. Indian economy is

small, with limited surplus capital. Indian government is already operating on budget deficits.It is

simply not possible for Indian investors or Indian government to fund thisexpansion, job creation

and growth at the rate India needs.Thus, Global investment capital through FDI is

necessary.Beyond capital, Indian retail industry needs knowledge and global integration. Global

retail leaders, can bring this knowledge. Global integration can potentially open export markets

for Indian farmers and producers. Walmart, for example, expects to source and export some $1

billion worth of goodsfrom India every year, since it came into Indian wholesale retail market

CONTROVERSY 4: Work will be done by Indians, profits will go to foreigners.With 51% FDI

limit in multi-brand retailers, nearly half of any profits will remain inIndia.Any profits will be

subject to taxes, and such taxes will reduce Indian governmentbudget deficit.Many years ago,

China adopted the retail reform policy India has announced;China allowed FDI in its retail

sector. It has taken FDI-financed retailers in Chinabetween 5 to 10 years to post profits, in large

part because of huge investments they hadto make initially. Like China, it is unlikely foreign

retailers will earn any profits in Indiafor the first 5 to 10 years.Ultimately, retail companies must

earn profits with hard work and by creatingvalue.

CONTROVERSY 5: Remember East India Company. It entered India as a trader and then took

over politically.Comparing 21st century to 18th century is inappropriate. Conditions today are

notsame as in the 18th century. India wasnt a democracy then, it is today. Globalawareness and


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news media were not the same in 18th century as today.Consider China today. It has over 57

million square feet of retail space owned byforeigners, employing millions of Chinese citizens.

Yet, China hasnt become a vassal of imperialists. It enjoys respect from all global powers.Other

Asian countries like Malaysia, Taiwan, Thailand and Indonesia see foreign retailers as catalysts

of new technology and price reduction; and they have benefittedimmensely by welcoming FDI in

retail. India too will benefit by connecting with theworld, rather than isolating itself.

CONTROVERSY 6: Smaller states will not be able to handle.States have a right to say no to

retail FDI within their jurisdiction. States have the right to add restrictions to the retail policy

announced before theyimplement them. Thus, they can place limits on number, market share,

style, diversity,homogeneity and other factors to suit their cultural preferences.Finally, in future,

states can always introduce regulations and India can change the law to ensure the benefits of

retail reforms reach the poorest and weakest segments ofIndian society.

FDI inMulti Brand Retail:A WIN WIN MOVE # more benefits..

Benefit 1Better infrastructure will wipe out inefficiencies ofour distribution systems.Due to

inbuilt inefficiencies and wastage in distribution and storage about 40% offood production

doesnt reach consumers.50 million children in India are malnourished.Food often rots at farms,

in transit, or in antiquated state-run warehouses. Cost-conscious organized retail companies will

avoid waste and loss, makingfood available to the weakest and poorest segment of Indian

society, whileincreasing the income of small farmers.

Benefit 2Prevent labour exploitationIndian small shops employ workers without proper

contracts,making them work long hours.Many unorganized small shops depend on child

labour.A well-regulated retail sector will help curtail some of these abuses.They will get better

working conditions, better wages.


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Benefit 3NO!It will not eat up the unorganized retail market.It has been long debated that the

unorganized retail players will be theworst hit. Ill give u reasons against.1. The unorganized

retail market is as large as 95%.2. also the traditional market is very deep rooted in our

economy.3. The kirana stores always have their place in the map; all because they have a space.

They dont survive because of the scalebut for their location

enefit 4It will curb inflation.FDI in retail sector will transform the way perishable agricultural

produce isacquired, stored, preserved, and marketed -- and thus help control Indiaspersistent

food inflation.The gap between farm gate prices of agricultural produce and the retailprices (in

India) are amongst the highest in the world as also amongstthe emerging markets a farmer can be

approached by retailer, processor, etc., directly and notthrough intermediaries, which alone will

help bring down prices by25%. Today this is not allowed.

Kaushik Basu speaks:According to Basu, FDI in retail will also lead to other beneficial effects:

Capital inflows into retail will improve the quality of overseas moneyused to bridge the current

account deficit, the gap between imports andexports of goods and services. Also, as international

retailers begin sourcing in India, eventually theycould help some small producers export some of

their produce and easethe pressure on the current account, he said.

Wrap up:The Final StanceWe will look at any partnership that could helpus become more

competitive.But we are unwilling to give a majority stake toany partner. -senior executive,

spencers retail chain.

To be prosperous in a time of unprecedented demographicexpansion, India must be willing to

change, and all changeinvolves both winners and losers.In the case of foreign participation in

retail, the winners willdramatically outnumber the losers!

fdi in retailing

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